Buy-to-let, in one form or another, is one of the most popular investment choices among everyone from small-time individual investors who use it as a savings strategy to major institutions. The property market certainly has a strong reputation as a stable and lucrative way of growing money, and it is certainly capable of living up to that reputation.
What are the Risks?
It is necessary to take a full and detailed account of all the financial factors before purchasing a property. This means not just balancing rents against mortgage repayments and management fees but also fully analysing the tax situation, including the tax changes that will be rolled out over the next few years. You should also ensure there will be enough of a gap between incoming and outgoing money to cover any maintenance costs that might arise. Take account as well of the fact that properties will not generate income while sitting empty, so vacancy periods will also weigh on your returns.
You should also be aware that it is often more difficult to obtain mortgages for investment properties than for a property you intend to live in. Similarly, if you ever wish to extract money from your property through home equity credit or cash-out refinancing, this will also likely be more difficult.
Holding a single buy-to-let property can also be a risk in itself. The lack of diversity makes you particularly vulnerable to any major changes in the market. Ideally you should not put all your invested capital into one property, but rather put some into a different type of property or different investment altogether.
What About the Rewards?
Failing to look at the risks would be very unwise, but looking only at the risks would give a misleading, negative picture of property investment that the sector does not deserve. So what are the rewards that offset these risks and continue to attract investors to the life of a landlord?
The fact is that many landlords do enjoy success from their investments, and property has a lot of potential to be financially rewarding. If you do the maths and choose a good location where rents are strong and demand is high, then the risks can be considerably mitigated and the rewards are financial returns that far exceed those of many alternative investment types.
Property also has the advantage of offering two streams of returns. Rents provide a regular stream of liquid income which will come to you monthly and will be immediately available in cash upon being paid. At the same time, assuming property prices keep trending upwards (and in most of the UK’s key locations, this is widely forecast) then you will also enjoy capital growth, although this will of course only actually become available to you when you sell the property unless you extract equity through credit.
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